Washington State's Chamber

President's Perspective

Friday, May 31

Higher Taxes and Costs Will Send Jobs Out of State

As lawmakers scramble to fund the state budget, some legislators and interest groups are targeting tax incentives designed to attract businesses and create jobs. Meanwhile, much-needed workers’ compensation reforms languish in the Legislature.

Critics say that, in these tough economic times, we can’t afford tax incentives. The real question is, can we afford not to have them?

And while lawmakers claim there isn’t enough time to tackle meaningful workers’ comp reforms, the truth is we can’t afford to wait when rates are set to spike for employers.

First, a little perspective.

In 2012, the state Department of Revenue published a study of 452 tax exemptions in Washington totaling $29.3 billion per biennium. Almost one-third — $8.9 billion— benefit individuals, mainly through property tax breaks and exempting food and prescriptions from the sales tax.

By comparison, tax incentives for businesses amount to $1.7 billion, just 6 percent of the total.

Business tax incentives are designed to produce more revenue than they “cost” by stimulating economic growth and jobs.

That’s the case with the single largest business tax incentive, the 1995 Manufacturers’ Sales and Use Tax Exemption, which exempts investments in manufacturing machinery, equipment and research and development from sales tax. Three independent accounting studies over the years have confirmed that, by stimulating business development and expansion, the exemption produces a “net profit” of tax revenue for state and local governments.

Nonetheless, it’s being targeted as a “loophole.” But it makes no sense to eliminate a tax incentive that brings in more money than it costs.

That kind of thinking plays right into the hands of competing states.

While Washington’s lawmakers talk about eliminating incentives, New York has launched an aggressive campaign to lure employers to the Empire State.

One of New York’s biggest projects is a direct threat to our state.

WaferTech, the world’s largest integrated circuit semiconductor foundry, has about 1,000 employees at its massive complex in Camas. The manufacturers’ sales tax exemption was one of the incentives approved by legislators 16 years ago to get the company to locate its $1 billion plant in Washington.

The Camas facility produces 200 millimeter wafers, but the new industry standard is 450 millimeters, which can carry vastly more circuitry. It is an example of how quickly advances in technology can render older facilities obsolete.

New York has already won Round One of this battle.

New York convinced a consortium of high-tech companies (Intel, Samsung, IBM, TSMC — WaferTech’s parent company — and Global Foundries) to site its first 450 millimeter production line in Albany, a $40 billion project.

But New York isn’t stopping there. State officials plan to use this investment as leverage to convince the consortium to move its member companies to New York.

In the midst of this fierce competition, Washington cannot afford to sit idle.

The Association of Washington Business has always said that tax incentives should be periodically reviewed to see what works, and our state has established a process to do just that. However, blindly targeting business tax incentives just to get some quick cash is irresponsible and shortsighted.

Employers consistently warn that the benefits of Washington’s skilled workforce, affordable energy and quality of living are offset by high business costs.

For example, our state’s workers’ compensation cost, among the highest in the nation, could rise by as much as $2 billion over the next 10 years. But while our state lawmakers seem unable to agree on reforms, Ohio — which has a similar workers’ comp system — just rebated employers more than $1 billion in premiums and has a three-pronged strategy to lower costs.

If you were an employer, where would you rather be?

Bottom line: This is not the time to eliminate tax exemptions and make it more expensive to do business in Washington.